2014 Predictions for the Real Estate Market

Each year I take time to review what has happened during the year and to look forward to predicting what is in store for real estate. Below are my predictions for the 2014 real estate market, based on data that was available at the time this was written. Fifteen of these predictions relate to residential real estate; two are specific to non-residential properties; three have to do with interest rates and lending and the final five pertain to the economy.

Here’s what I’m seeing for real estate in 2014:

PREDICTIONS FOR RESIDENTIAL REAL ESTATE

1. Housing Inventory – There are a number of factors affecting housing inventory levels. Low interest rates are attracting investors from hedge funds and private equity firms that are purchasing real estate for rentals. The economy is improving and improved consumer confidence has brought more buyers back into the market. Foreclosures are down and short sales are rapidly going away because they do not exist in an inclining market. New construction is still not where it needs to be so inventory challenges will continue throughout 2014. The increase in investor demand is forcing inventory numbers down to record low levels. These investors include Baby Boomers who are investing in second home properties and rental properties. All of these factors will contribute to a housing inventory shortage in 2014 in many areas and in many price points.

2. Market time –Market time began to decline quite rapidly in the late spring of 2013. Multiple offers returned with a vengeance as short sales and foreclosures began to decline and incoming inventory slowed to a trickle. Market times continued to decrease until the government shutdown. Since then market times have stayed steady. In 2014 market times will decrease because demand remains strong in many price points and in many areas. Lack of new construction inventory, record low interest rates, the return of consumer confidence, household formation purchases and investor buying will cause market times to decrease even greater than they did in the spring of 2013.

3. House prices – House prices will increase dramatically in 2014 in part due to shortages in inventory. Other factors that will add to the increase in house prices include high demand from investors buying single family homes to hold as long term rentals, a decline in foreclosures and short sales and an increase in buyer demand. The median expected house prices should rise over 12% nationally while the State of Washington should rise 12 – 14%. Home prices will see a strong upswing in an overwhelming majority of metropolitan cities. City life is luring Baby Boomers and Gen X’rs, and buyers are rushing to buy properties closer to urban centers, causing an increase in prices and dramatic decline in inventory. Therefore, house prices will increase by over 20% in many markets like Seattle and surrounding areas. Prices will increase as high as 30% in some harder hit areas like Las Vegas, Arizona and Florida.

4. Housing Affordability rate – The affordability index measures the relationship between median home prices, median household incomes, and interest rates. An affordability index of 100 means a household earning the median household income would pay exactly 30% of their monthly income toward the principal and interest of their mortgage. Above 100 is more affordable, while below 100 is less affordable. With home prices rising quickly (up 12% nationally from last year) and mortgage rates inching up (up a full percentage point from spring of 2013) housing affordability has decreased and has now dropped to a five year low. The affordability rate will continue to decline as interest rates increase and home prices rise.

5. House Price Index – According to the Federal Housing Finance Agencies (FHFA) House Price Index (HPI), in the third quarter 2013, nationally house prices rose 2% from the previous quarter and up 8.4% since the third quarter 2012. This is the ninth consecutive quarterly rise. Many housing markets have now stabilized and home builders are beginning to plan upcoming projects. Of the nine census divisions, the Pacific division experienced the strongest increase in the last quarter with a 4.2 percent price increase and a 19.2% increase since last year.

6. Pending home sales – Due to the improving job market, rising rental rates, continued low interest rates and continued housing affordability, pending home sales will increase dramatically in 2014. There will also be an additional increase in pending home sales as investors purchase homes as long term rentals. Lack of inventory in new construction will prevent pending sales from reaching higher levels. Pending home sales would have been higher in the fall of 2013 had it not been for the government shutdown.

7. House price appreciation for high-demand areas and high-demand housing styles – House price appreciation in many high-demand areas and high-demand housing styles will reach over 20% in 2014. Specifically ramblers, urban hubs, smaller properties with high-end finishing, homes for Baby Boomers with aging parents, and homes for Baby Boomers with boomerang children will continue to be in high demand in 2014. Home values will appreciate as high as 20% in some areas with 2014 average appreciation to rise from 7.2% to over 8%. Average annual appreciation from 2014 – 2018 could reach over 8% per year with a cumulative appreciation to 2018 of over 25%.

8. Median house prices – The median existing single-family home prices rose in 88 percent of measured markets in the third quarter, 2013, with 144 out of 163 metropolitan statistical areas (MSAs) showing gains. Fifty-four areas had double digit gains and 19 had price declines. The national median home price was $207,300 at the end of the third quarter compared to $184,300 during the third quarter of 2012, which is an increase of 12.5 percent. This represented the strongest year-over-year increase since 2005. In 2014 I am predicting that the median home price will increase in over 150 of these metropolitan areas. I also predict that the national median home price will increase by over 16%.

9. New construction demand – There will continue to be a severe shortage of new homes in 2014. The US needs approximately 1.2 – 1.5 million new homes each year to accommodate a growing population and the demolition of decayed properties. The drastic decline in new construction from 2006 through 2012 created a dramatic shortage in new construction product. New construction in 2013 was not high enough to make any kind of dent in the shortage of supply. It will take years to make up for the lack of new construction we have experienced in the past 6 years. It will take 7 years to make up that deficit if the current rate of building stays the same as it is now. New construction inventory shortages will cause resale house prices to continue to rise in 2014 because of the shortage of new construction inventory. New home demand will also continue to increase in 2014.

10. New Home Sales – New home sales in 2014 will be high relative to the inventory available of new homes. New home sales continue to increase. The lack of inventory is keeping the new home sales numbers down. As new construction increases and available new homes come onto the market, the new home sales number will increase. This number is directly tied to current inventory which is still too low in relation to the demand.

11. Housing Starts – From 1995 to 2003 the average housing starts were 1,256,000 starts. In March of 2009 we hit a 20 year low of 353,000 which is well below what is needed to sustain demand. In August of 2012 we hit 535,000 which is a dramatic 52% increase from the 2009 low. In 2013 those numbers have surpassed 600,000 which is still well below what is needed to sustain our new construction demand. Based on this demand and the expectation that builder lending will loosen in 2014, I expect 2014 starts to increase by over 20%.

12. Remodeling – The demand for traditional remodeling and for lifestyle remodeling will continue to increase in 2014. This is due to the demand for floor plans and homes that can accommodate multi-family living. Due to our aging population, bathroom remodeling will continue to exceed kitchen remodeling in 2014.

13. Household Formation Needs – Household formation is a big part of what drives the real estate market. Household formation refers to the number of homes we need to accommodate the different types of households. This includes married couples, people living with parents or children, single people, divorced individuals etc. For example, divorce drives household formation needs up because instead of living in one home together they live in two homes once separated. Single people as well as those waiting to get married later in life also drives this number up. Bad markets and recessions bring household formation numbers down (as adult children may choose to live with parents instead of on their own or people may wait to get married due to economic uncertainty). Additionally, other factors such as immigration and migration affect household formation. 2014 will see an increase in household formation purchases because as the market improves so does consumer confidence which means more individuals who were living together due to financial issues are now moving out on their own.

14. Second Homes Market – Second home sales will continue to have a strong increase in 2014 due to the passing of wealth from the Silent Generation (those born 1925 – 1945) to Baby Boomers (those born between 1946 and 1964).

15. Seriously Delinquent Mortgages – At the end of November, over 734,000 homes were still in some stage of the foreclosure process which is down almost 25% from a year earlier. Completed foreclosures are down 30% from last year to 470,000. Almost 70 percent of all homes in some stage of foreclosure are on mortgages taken out between 2004 and 2008. This declining number is due to more homeowners being able to pay their mortgage payments because of rising home prices and steady job growth. Foreclosures hit over a million in 2010 and have been declining since. Short sales will disappear in 2014 because short sales do not exist in inclining markets.

PREDICTIONS FOR NON-RESIDENTIAL REAL ESTATE

16. Commercial – This market will only improve slightly in 2014. Positive influences will include job creation, modest economic growth, and the easing of commercial lending standards. There is still concern that the commercial recovery will be unsteady because of increased concern over issues including the healthcare and government issues including the debt ceiling. The commercial market in 2014 will have modest growth.

17. Multi-family – Demand for multi-family housing will continue to increase in 2014. The demand for rental properties has increased dramatically creating a strong demand for multi-family housing. From 1995 to 2003 there was an average of 331,000 multi-family housing starts with that number plummeting to 82,000 in 2009. Multifamily housing starts in 2013 finished around 260,000 units. I anticipate a modest increase in 2014.

PREDICTIONS FOR INTEREST RATES / MORTGAGE LENDING

18. Interest rates – The Federal Reserve intends to keep the funds rate near zero until the economy is stronger. This will ensure that short term rates remain low through 2014. With this rate at a historic low (between 0 and 0.25%) since 2008, the short term Fed funds rate should not raise much before 2015. Longer term rates will rise in 2014 due to increased activity in the housing market and because of a stronger global economy. Treasury rate to rise to 3.1 – 3.3, and 30 year mortgages currently at 4.45% could rise to 5 – 5.5% by the end of 2014.

19. FICO Scores – FICO scores for closed loans had increased substantially from 2007 – 2012. This meant it was harder for a person to get a loan. FICO scores on closed loans will reduce in 2014 due in part to easing up of lending which will result in another surge of buying in 2014. In 2014 FICO scores on closed loans will average below 690.

20. Credit Availability for Builders – With the demand for new homes, lenders will soften their lending requirements for builders in 2014. Builders that previously could not get financing will be able to qualify in 2014 under new builder programs. Bank profitability equals available credit for builders.

PREDICTIONS FOR THE ECONOMY

21. Unemployment Rate – State of Washington – The unemployment rate in Washington State is 7.0%, down from a high of 10.2% at the end of 2009. By the end of 2014, the State of Washington should see unemployment rates as low as 6.4%. National Unemployment Rate – Nationally our unemployment rate is down from the 10% high we hit in October of 2009. We are currently at 7.0% (November, 2013) and by the end of 2014 we could hit as low as 6.8%.

22. Inflation – The annual US inflation rate for 2012 was 2.1% which was lower than 2011’s 3.2% and higher than 2010’s 1.6%. The historical annual US inflation rate is 2.97%. The inflation rate in 2014 should increase as the economy improves and should tick up slightly to an average of 1.8 or 1.9%.

23. Deficit Spending– Deficit spending is the amount of spending that exceeds revenue. A deficit occurs any year that the government takes in less revenue than it spends. The United States gross national debt is currently more than 17 trillion. I do not expect there will be much change to this number in 2014.

24. Consumer Confidence – Consumer confidence, which rolls the facts and feelings about how we are doing as a country into one neat package, hit a high not seen in five years of 82.1 in June. It dipped after June and after the government shutdown issue sank to 70.4. I predict the consumer confidence index will hit 83-85 in 2014.

25. Consumer Spending – Consumer spending is on the rise as consumers begin to feel more confident about the economy. Consumer spending drives over 70% of the economy with the biggest spending done in housing and transportation. If consumer spending drops off, economic growth will slow, prices will decrease, and the economy can go into a recession. Inflation occurs when consumer demand for products and services is greater than the ability to provide the goods and services; this causes prices to go up. The Federal Reserve’s mandate is to ward off inflation. Consumer spending in 2012 and 2013 was up. I predict consumer spending will also increase in 2014.